Automakers riding high, but are we in the midst of an auto bubble?

Oct. 20, 2013

Everyone agrees: The auto industry is on a roll, continuing its recovery from the depths of the Great Recession, which saw two big U.S. automakers fall into bankruptcy and thousands of jobs lost as factories and dealerships closed in record numbers. But can the current growth continue, or is the bubble about to burst? / File / The Tennessean

Written by

G. Chambers Williams III

The Tennessean

U.S. light-vehicle sales

By calendar year (rounded): 2007:…16.5 million 2008:…13.5 million 2009:… 10.6 million 2010:… 11.8 million 2011:…13.0 million 2012:…14.8 million 2013:… 15.5 million (projected) 2014:…16.4 million (projected) Source: WardsAuto Group, Edmunds.com

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Everyone agrees: The auto industry is on a roll, continuing its recovery from the depths of the Great Recession, which saw two big U.S. automakers fall into bankruptcy and thousands of jobs lost as factories and dealerships closed in record numbers.

But can the current growth continue, or is the bubble about to burst? The opinions are mixed, both within the auto companies themselves, and among industry observers, as well.

Industry forecasts are that 2013 will end with more than 15.5 million new vehicles sold in the United States, up from 10.4 million when sales bottomed out in 2009, the year General Motors and Chrysler had to reorganize in federal bankruptcy court.

For next year, some forecasters are even more bullish, with predictions that sales could reach 16.4 million, pushing the industry close to its pre-recession levels (16.5 million in 2007).

“The average age of all light vehicles on the road climbed to 11.4 years in 2013, and an aging fleet will continue to force buyers back to the market next year,” Edmunds.com chief economist Lacey Plache said in connection with his forecast of 16.4 million sales in 2014. “With used car prices still elevated over past norms and used car supply still tight, the new-car market will remain attractive.”

Edmunds notes in its forecast: “Many of the same sales drivers from 2013 will remain in play and support car-sales momentum. The release of pent-up demand from buyers who deferred sales during the recession will continue as the increasingly aged fleet drives more consumers back to the new car market.”

But some say these forecasts are too rosy, and that the car-sales bubble that has been driving the growth of manufacturing capacity, especially in Tennessee and the South, might be in jeopardy.

Those views were fueled by recent comments by Toyota’s top U.S. official, Jim Lentz, who suggested that sales could begin to drop again as early as late 2014 — especially if the economy doesn’t get better.

Franklin-based Nissan North America takes the opposite view, though, and it’s not just unfounded optimism, said Dave Mazur, the automaker’s vice president for market intelligence in the Americas.

“We don’t see any doom-and-gloom on the horizon,” Mazur said. “The auto industry has been leading the nation’s economic recovery with slow, steady growth. We haven’t seen anything that tells us we should be concerned.”

The federal government shutdown has affected October sales, but with that resolved, the market should rebound quickly, industry officials say.

“We think this shutdown is just a bump in the road, unless they do something really stupid,” Mazur said.

Despite the problems in Washington, “consumer confidence is up,” he said. “We look at new unemployment claims, and they tend to be trending down. Housing inventories are down, as well.”

That’s good news for automakers who sell trucks, he said, because it indicates there will be a rebound in housing construction, a big market for pickups.

Also, he said, there are going to be more people to sell cars to, particularly as more immigrants come to the United States.

“The population continues to grow, and so does the number of licensed drivers,” Mazur said.

Because the average age of vehicles on the road is at an all-time high, dealers tend to be optimistic, at least for now, said Ben Freeland, CEO of the Freeland Chevrolet Superstore in Antioch.

“The pent-up demand is still there, and probably will be for a while yet,” he said. “Taking out the things we can’t control, like government budget issues and shooting ourselves in the foot on a national economic basis, we still have plenty of room to grow. We have not had a huge spike of growth or oversell. What we’re seeing is sales going back to normal levels.”

Credit boost

Also feeding the sales growth has been a return to normal credit availability for car buyers, after a period of tight credit during the recession that helped keep sales depressed, he said.

“We’re still seeing strong demand, and there is lots of quality product on the market,” Freeland said. “We have to make sure that consumers maintain the confidence to go out and make those buys.”

Dealers are doing better, too, but many have been saddled with debt forced on them as the automakers pushed for upgrades to dealership facilities over the past two or three years, Freeland said.

“Things have to go well for a long time for dealers to recoup their money in these investments in their facilities,” he said. “But many dealers needed to upgrade anyway, and customers seem to like it.”

At online buying service TrueCar.com, chief industry analyst Jesse Toprak is among those who are positive about the future, at least over the next couple of years.

“We’re predicting about 16.4 million sales next year, and we think it could even reach 17 million in 2015,” he said. “Seventeen million is a number we’ve never seen, but there’s no reason why we can’t get there. The critical factors this year are the economy and the stock market. There is a strong correlation between auto sales and the Dow Jones Industrial Average.

“Interest rates are key, as well,” Toprak said. “Eighty-five percent of all new-car shoppers finance, so as long as they have access to financing and rates are cheap, there is no reason for it to slow down.”

Dissenting views

Longtime industry analyst Jeremy Anwyl of Marketec Systems says some level of a slowdown is ahead.

“We’ve seen a nice rebound, and we’re going to start to see a decline, but I can’t say exactly when and how much,” he said. “There is no science to this. What is unusual about this recovery is that it hasn’t followed past patterns. In the mid-80s, after the then recession, sales spiked back up quickly. But this time, even though they dropped quickly, they didn’t come back as fast. So we don’t have any historical precedent for what’s going on now.”

Still, Anwyl doesn’t predict a steep drop-off in sales, he said.

“It will just slacken a bit, unless something else happens that we don’t know about yet. It would take some sort of external shock to make it worse. But it’s clear that we’re living in a charmed bubble right now.”

Also not so optimistic is Jack Nerad, executive market analyst for Kelley Blue Book.

“I think there’s a chance the bubble will leak some,” he said. “The economy is still not strong, and even though we have had big bursts of sales, the rest of the economy hasn’t been keeping pace.

“Manufacturing is flat, unemployment is still high, and people are giving up looking for work,” he said. “That’s not a great background for continued growth. Interest rates are very low now, too, but that’s not going to continue.”

Nissan continues to build momentum with new products, shifting production to the United States from abroad, and expanding its plants. Employment at the automaker’s Smyrna manufacturing complex has now moved above 7,000, up from about 4,000 before the company began expanding two years ago.

Whether Nissan’s growth in manufacturing capacity here will pay off is yet to be seen, Kelley Blue Book’s Nerad said.

“Tme will tell,” he said. “Too much capacity is a major problem with the entire industry, and it hasn’t been resolved. It’s typical of car companies to be overly optimistic about sales projections, though.